HDI Global maintaining a smooth line

HDI Global
02:46' CH - Thursday, 18/05/2017

Commercial Risk Europe Editor Adrian Ladbury interviewed Christian Hinsch, CEO of HDI Global SE: Recent results from the international insurance and reinsurance market have shown once again how difficult it can be to maintain a steady and consistent growth path in this tough operating environment. HDI Global SE, however, appears to achieve exactly what serious long-term customers and investors seek from their risk carriers. HDI’s Dr Christian Hinsch told Commercial Risk Europe that, as in motor racing, there is no magic formula. The key is maintaining a consistently smooth driving line, properly assessing the risks and being strong enough to avoid manoeuvres that could lead to a calamitous crash.

Number games

The combined ratio improved to 96.8% against 99.2% the previous year. HDI Global said the burden of large losses remained below its target. This led to an increase in operating profit of 42% to €296m from €208m in 2015. Group net income increased by 86% to reach €236m.The result was unaffected by development of prior years' reserves. HDI Global did not have to post reserve additions as others have done in this latest round of results. So this was a pretty pure result compared to others in the market. The slight reduction in premium was driven by major re-underwriting of the HDI Global book in its core German market, which commenced in the autumn of 2015.

As Dr Hinsch explains to Commercial Risk Europe: "The German book was down while the international business was up. The lack of growth in the German book was due to the re-underwriting to focus on more profitable business. In such an environment you cannot really expect growth and this is fine with us."

The fact that HDI Global's re-underwriting strategy is working was underlined by the improvement in its underwriting result. Dr Hinsch says this performance is explained by three factors. First, the company's large loss budget was unexhausted by some 20%, mainly because the insurer suffered no major catastrophic events during the year. Second, re-underwriting of the German property book has led to a reduction in the group's overall exposure. Shares were reduced, prices raised and self-insured retentions increased. Dr Hinsch says a reduction of some €130m in gross loss burden was directly attributable to the re-underwriting exercise. "This was not just luck but a consequence of our reunderwriting exercise", he says. Third, due to a conservative initial reserving policy, HDI has posted a reserve release for the past 30 years. The release in 2016 was lower than average but investment income was up. This helped boost the return on investment ratio and operating result.

HDI Global's decent results were in stark contrast to some other leading international insurers that were forced to report significant losses because of major reserve additions. Mr Hinsch was asked how HDI Global managed to deliver a result that was not hampered by such problems. "If you look at these reserve additions posted by some competitors, this is for business written years ago. Some companies apparently did not set reserves in the appropriate way at the time for their liability business. Liability business is an important part of our book, roughly equal to property, so we know how important it is to reserve properly. Maybe some peers showed better results in past years than they should have done. Another possible explanation is that perhaps they were aggressively growing at insufficient prices. If you do not set your IBNR (incurred but not reported) numbers adequately when you are strongly growing your book, especially in a soft market, then you will have a problem in future years", comments Dr Hinsch.

The more difficult thing is to hold a firm line in a competitive market while, at the same time, protecting your best business. It is fair to say that HDI Global was subject to a great deal of criticism from risk managers and brokers when announcing its re-underwriting strategy in Germany back in 2015. But Dr Hinsch says that ultimately, the market had to accept the sense and consistency behind its approach. "I am happy that we have the experts needed to apply an individual account-by-account approach, and so in the renewals of 2015 and 2016 we hardly lost any business that we wanted to retain. We did not have to use a simple ten-per cent-more-on-every-account approach. It helps of course if you are lead carrier as we are, because you have more to offer than just the lowest prices, namely quality service. If you are a follower in this market, the broker can quite easily replace you", explains Dr Hinsch.

No hardening in sight

Like its competitors, HDI Global would of course benefit from an overall market hardening as we have seen in the past. But risk managers will be pleased to hear that Dr Hinsch sees few signs of that in sight.

"There are no major signs really. If you look back over the last ten years, there has been no true hardening. There may have been a few weeks or months of a shortage of capacity in certain lines but it has been shortlived. In this interest rate environment, there is a lot of new professional capacity still entering the market", he says. Much of the fresh capacity that has entered the market in recent times has come into the international specialty market. There has been a tremendous growth in managing general agents - often owned by brokers - notably in London. Dr Hinsch says customers really need to understand the difference between this kind of capacity and that offered by major international insurers such as HDI Global. "I would really see a big difference between the specialty MGA-type capacity typical of Lloyd's and companies such as ourselves. This capacity can go away just as easily as it arrives. With the big international insurers, in the major lines such as property and liability especially, it is a different story", he argues.

Dr Hinsch is a big fan of motor racing and sees a good analogy here. "In racing it is better to have a smooth round driving style. You do not want to go too fast into the curve and have to break suddenly and pass the corner square. Abrupt movements adversely affect your driving line. In our market, such an erratic approach confuses staff, customers and brokers. I would rather avoid completely exiting lines or sectors. This is not our approach. We have to underwrite intelligently and see each risk individually on its merits. If we exit a line completely we would lose also the underwriting experts that help us to distinguish between desirable and undesirable risks in that line in better times", he explains. HDI Global's reduced appetite for certain marine business and motor fleet in Germany is no secret. But this does not mean that the insurer will simply pull out of these important lines lock, stock and barrel.

The marine line of business has a very challenging loss history, but if you look closer it is not actually marine in general, it is rather storage risks, especially in the auto industry. This is now part of our balanced portfolio strategy. "I must emphasise that this does not mean that auto industry risks are intrinsically bad, they are risks that we look for and like. But the price has to reflect the loss history over time therefore we need some adaption to the current situation", says Dr Hinsch. One area that HDI Global has fully pulled out of, however, is ocean marine hull. It used to underwrite this cover through operations in Oslo acquired as part of the Gerling Group, but this business was sold to Norwegian insurer Skuld in November of last year.

Where is the growth?

HDI Global's investors and customers would not, however, be overly impressed if the company was not able to accompany its conservative underwriting story with some more positive growth stories. One area where Dr Hinsch sees good potential is the middle market in Europe. The bottom line is that these companies, which form the backbone of the European economy, are becoming more aware of their risk profiles, especially as they seek growth in international markets. This represents a chance for international carriers like HDI to generate fresh premiums, explains Dr Hinsch. But it also requires investment to move closer to the customer.

"This needs investment and we are currently expanding our footprint in Europe with new local offices in Glasgow, Lyon and Genoa, for example. In April, we will open in Bern our third office in Switzerland. So, we are starting to get closer to our customers in a literal sense. One of our unique selling points has always been a desire to be close to the customer. This goes right back to our beginnings as a mutual for German industry", explains Dr Hinsch. But how can such investment for growth be justified when combined ratios, and the loss ratios that underpin them, are rising and there is little sign of assistance from a market hardening or booming investment returns? In this respect, Dr Hinsch says HDI Global possesses a competitive advantage because at 21.8%, its expense ratio is already lower than most major rivals.

The group also takes a more cautious approach than others, enabling it to expand on a profitable basis rather than as a loss leader. "We do not really have a cost issue. In line with the desired smooth driving style, we do not invest big before the business is there and later may have to reduce big when it does not come. We rather take smaller steps and see how it works out", explains Dr Hinsch.

Primacy of service

In such a competitive market, one of the best ways of differentiating yourself and convincing the best business to come your way or renew, while standing firm on prices, is to deliver exceptional service. Dr Hinsch is more than aware of this and sees six key areas where his company needs to concentrate its efforts.
First, there is the need to be ever closer to the customer. "This is very, very important. Everyone claims this, but I think I can genuinely say that we are known for this. This is an ongoing process of finding out individually exactly what their needs are", says Dr Hinsch.
Second, any insurer that claims to be serious about this market needs a proper global network. "This sets apart the lead from the capacity providers, the followers", says the HDI man.
Third, there is a need for long-term commitment to this market. There is always a temptation to exit the market, or parts of it - regionally or by segments or lines of business - when terms change. But the wider benefits of the longer play more than compensate for short-term financial gains, argues Dr Hinsch.
Fourth, the insurer needs to display an independent and entrepreneurial, open-minded approach towards risk. This is again something that is easy to claim, but in reality insurers often just follow the pack. Dr Hinsch points to HDI's independent decision to insure year 2000 risks where many others refused, as an example of where his firm breaks the mould.
Fifth, the serious global insurer needs to be able to offer in-house risk engineering support and expertise, says Dr Hinsch. "Some of our competitors claim they have this but I am not so sure. Our risk engineers really have to live and breathe our philosophy and transfer that to our partners", he says.
Finally, and potentially most important in this market, there is claims handling."To the customer, claims handling is actually the equivalent of the premium. It is the most important of all services for an insurer. Therefore, it cannot be outsourced, it must be in-house, as you can guarantee excellence only if you are in charge", says Dr Hinsch.

Partnership and innovation

Deep and long partnerships are very important when attempting to tackle challenging emerging risk areas such as supply chain, he argues. These must be based on a good deal of trust. In particular, supply chain is all about lots of quality information and effective exchange of data."If you have lots of quality data, then there should not really be any problem insuring it. But you do need the data to properly embrace the risk. The problem in supply chain is that most customers do not appear to have that data", says Dr Hinsch.

This area stresses the significance of recent advances in data, technology and analytics within the corporate insurance sector. The broader personal lines market - motor, household and the like - may well be getting very excited, or scared, about the potential offered by big data for the future of the business and a likely demise of the traditional underwriter. A real revolution. For the corporate insurance market, data and technology can help support the expert underwriter, rather than replacing the role. It also offers the potential to deliver a more efficient and effective distribution and administrative model. So in this market it is more about evolution. "We are investing heavily in our back end and front end. We plan to introduce a portal for HDI Global this year. Of course, others already have this so it is not such big news in this sense. What is really important is what lies behind it - hot air or substance! We will only launch this when we are ready with real substance. I do believe that such a digital interface with customers and brokers is the first step to exchanging data on supply chain and other risks that will help us analyse and price such risks and make significant steps forward", explains Dr Hinsch.

Will the rise of such technology radically change the entire insurance model and, particularly, distribution? Yes and no, according to Dr Hinsch. "This is more a danger for the brokers than for the carriers and clearly more on the retail, personal lines and SME side of the business. I do not see such automation and commoditisation coming into the corporate business that is becoming more, rather than less, complex. I do see a lot of consolidation in the retail broker market, but you will not see an automatic market-wide platform for global programme business any time soon", he says.

Dr Hinsch recognises that the insurance distribution chain is undergoing significant change. It is interesting to see the rise of broker facilities and MGAs in particular. Also, Dr Hinsch understands that customers may not be overly happy with the oligopolistic nature of the global broking community. This will inevitably lead to new opportunities for specialist and flexible independent brokers.

Dr Hinsch would not be surprised to see further M&A deals in the insurance and reinsurance market. But it is highly unlikely that HDI Global will be part of a major transaction while he is in the driving seat. "We have experience of a major merger with Gerling. It has certainly helped us on our current path but I do not see a major M&A deal for us as a preferred option now. We will continue to grow organically and may see options for acquisition in local markets. A major deal makes sense only in special circumstances because it can seriously distract the organisation for years and add complexity. But we are definitely interested in bolt-on acquisitions here and there", concludes Dr Hinsch.

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